Last month, someone contacted me about discussing personal finance with the residents. That’s still up in the air, but I thought it might be a good idea to start preparing.
I have a very good friend, who did not have the advantage of learning about finances from her parents. Over the years, she and I have talked a bit about money (saving, investing, paying off the mortgage, investing, giving to charity, investing). She has, on more than one occasion, stated that our conversations were helpful. I decided to ask her what was one of the most helpful topics we had discussed; she said investing. She said she always she did a good job saving, but didn’t feel comfortable with investing for a long time.
So I started thinking about how to talk with the residents about investing. Around the same time, I saw several comments on other financial websites, mostly early career physicians who were feeling way behind. This is probably related to the fact that most of those who post are usually successful, settled physicians 5-25 years further along in their careers.
This stuck with me, as I was going through all the things I think a person should have squared away before investing. I realized there are quite a few prerequisites, which I took care of years ago, and seldom think about anymore. Most of these are related to laying a stable financial foundation.
After all, experts usually note somewhere (usually very early on in their books, and maybe in small print) that you shouldn’t invest money you will need in the next several years. This is because the higher returns you should get with investing are meant to compensate you for the risk (hopefully small, but still present) that you could lose your money. Maybe even all of it.
Therefore, you need to get your financial house in some sort of order before send your money out to be invested, and that’s what I would like to talk about today.
Money to Spare
Yes, you need extra money. Another way to look at this: you can’t be spending every dollar that comes in.
Some people write about Minding the Gap, where the Gap is the difference between what you bring in and what you save (see discussions at: Afford Anything, Montana Money Adventures, and Chief Mom Officer).
I think about paying myself first.
In any case, if you have no extra money, you can’t invest it.
If you just started residency, you should have more money coming in than you did as a medical student. This is the time to think about putting some of it aside.
If you are just starting as an attending, you should definitely be making more than you did as a resident, and must plan to save. After all, if you don’t save now, when will you ever?
You may need a budget (see a sample or two that may or may not match your situation), but you can do it.
A Financial Safety Net
Your tire is flat and you need to get to work. You are going on an interview and find the moths got to your interview suit. You only realized that your toilet has been running continuously when you returned from vacation, and now you have to pay the huge water bill. Your last landlord hasn’t refunded your security deposit, and you were counting on that to pay for your moving truck.
Stuff happens and sometimes you need to apply money to fix it.
You need an emergency fund.
If you don’t have some money in the bank to take care of these sorts of issues, you don’t have enough spare money to invest.
You may read people who write about making their money work for them, or complaining about cash drag, and that’s fine. If they have a good income, and can cover these smaller issues without a blink, that’s wonderful for them.
If you just graduated from medical school and have ginormous loans, you probably don’t have a spare $400 sitting around. Before you start thinking about investing, make sure you have some money put aside to cover these unforeseen but not impossible scenarios. Otherwise, you can practically guarantee that the day before your emergency, the market will swoon. Now, the $400 you had “put away” in investments is worth only $260, and what are you going to do?
If you have been concentrating on saving each month, as a resident, you should hopefully be able to put aside this amount in a few months. Please keep it somewhere safe, like a bank. Possibly in a separate account so you remember not to use it for regular things.
If you are worried about making the most of your money, think about an online savings account (you can check Bankrate.com for an idea of where to put your money). Also keep in mind that having a minimum amount of money with your bank may (or may not) make you eligible for fee-free banking. (Go read your banking agreement).
Sinking Funds, or the Christmas Club model
You need to save for irregular costs.
These are costs that might be known, or reasonably expected, and are expected in the next few years. The idea is that you should plan to save for them now, so that when they come due, you don’t have to scramble to get the money together.
My first exposure to this was the Christmas Club, promoted by local banks and credit unions. Everyone knows Christmas comes every December 25, and many people want to spend on presents and parties. So banks would open these special savings accounts: you put in $10 a month, or $25, whatever, February through October or November. The money is locked up, and you can’t get it early. Then, at the end of the year, the bank returns it to you in time to pay your holiday bills.
Just as everyone knows that Christmas comes every year, there are some costs that you know are going to be coming. They might not be the same for everyone, but you have a good idea of what you might need: getting to your brother’s college graduation in June; a dress and a hotel room for your cousin’s wedding next year; a down payment (if not full payment) for a new-to-you car in case your rattletrap dies before residency is over.
A fund to cover your insurance deductibles (health, car, rental/home) is probably a very good idea too.
I have separate accounts for some of my expected expenditures: travel, house repairs, an eventual car replacement. I hide that money from myself, so that I don’t spend it on something else. Some people call them sinking funds. As long as you are putting a little something aside to make your life easier, it doesn’t really matter what you call it.
You might need a real emergency fund
Depending on where you are in life, you might need an Emergency Fund. With capital letters.
This is usually described as an amount equal to 3 to 6 months’ worth of required spending, also kept in a safe place (not invested). Usually this is to tide someone over if they lose their job.
As an intern or resident, your job is usually pretty safe and your income assured.
Unless you get fired for bad behavior. (In which case you are up a creek. Don’t do this!).
Or you need to go on FMLA, which is unpaid leave. Because women in their late 20s never have children. Or people of either sex never have unforeseen illness.
Or your hospital goes out of business.
You might not need a huge emergency fund if you have a good back up plan: your parents are well-off and would definitely take you in if disaster struck. Or your significant other makes good money in a different field and definitely couldn’t lose his or her job at the same time you lose yours.
Otherwise, you probably need an Emergency Fund, even if at the beginning it only covers 1 month of expenses.
The Bottom Line
This may all sound overwhelming, but it’s the sort of thing that people further along in their investing journeys may forget about.
Establishing good habits (like planning to save money), or setting up an adequate emergency fund (as long as you don’t have lots of emergencies), can be one-time issues. But if you don’t get them taken care of early, you may regret skipping these steps later.
As a reminder, the preliminary steps should be:
- Live on less than you bring home, which really also includes:
- Keep an account for unexpected expenses (the little emergency fund).
- Put aside money for irregular expenses (the sinking funds).
- Have a bigger emergency fund for big emergencies. This might be smaller at first (maybe just 1 month of expenses), but grow as you get ahead financially.
What do you think? Did I forget something? Will I bore residents, or scare them off investing altogether?